The general market concern right now is the huge new issuance pipeline. Last year many new issues were postponed, especially in high-yield. Whether this pipeline will materialise is uncertain, because if the market remains volatile, these issuers can explore other alternatives such as the loan or bank market, both onshore and offshore, do private placements or reschedule their capex.
The issuers likely to come to market are the Indian and Korean banks, who will continue to pursue expansion. However, issuance from high grade corporates and sovereigns will not be high. The only reason why these borrowers would want to come to market at this stage would be to broaden their investor base, or to get longer-term funding. But right now, they can borrow more cheaply in the bank market or the onshore/offshore loan market.
What about high-yield sovereigns?
Issuance from high-yield sovereigns could turn out to be moderate too. The frequent issuers have already tapped the market this year. Indonesia is likely to have fulfilled its funding requirements for 2008 with its $2 billion deal earlier this year and the Philippines has announced that it will reduce offshore debt issuance so (this week's) $500 million transaction could be its major issue in 2008. There have been talks of deals from Sri Lanka and Mongolia, and Vietnam has also mandated houses on a deal, but I am not sure whether these will materialise. Like high-yield corporates, a lot will depend on the market situation.
So which issuers will you favour?
The overhang of supply, as I mentioned, is our concern. Selective high-yield sovereigns will be a safer bet. I donÆt expect a lot of supply for high grade corporates, so this will also be a safer bet. Banks and financials are more of a concern.
WhatÆs your outlook in terms of issuance volumes in 2008?
ItÆs far too early to tell but if the pipeline materialises, including the deals postponed from last year, we may see higher issuance volumes than last year. However, itÆs very difficult to gauge whether the high-yield borrowers that we expected in the second half of last year will come to market.
After the events of the past two weeks, what is your sentiment?
We are very cautious at the moment and demand a high risk-premium for any new issue. In Asia, fundamentals remain largely intact but the financial markets in Asia and the US are connected. If the US continues to be volatile, the Asian market will be too.
The Philippines deal that priced this week was heavily oversubscribed. What does this reflect?
It reflects that liquidity in the market is still strong, itÆs just that people donÆt want to risk their money in markets that are this volatile. Right now, they want safer bets, not risky issuers, even if these do pay a high return. Therefore a Philippines sovereign is just the ticket, given the country's improved fundamentals, the modest issue size and strong support from onshore investors.
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